JPY Weakens On Talk Of Sizeable Trade Deficit Numbers Due Tonight

• Asian equities move higher as risk returns and USD and JPY and Gold move lower
• European equities open higher as risk benefits commodity currencies and oil
• JPY weakens as risk on helps currency head lower and talk of sizeable trade deficit numbers due tonight
• Gold slips back as risk on helps reduce flight to safety as seen in recent sessions
• Better risk environment helps Oil higher, back above $93 a barrel and that helps CAD strengthen to best levels in 4 days
• News that Greek banks to receive EUR 18 billion in assistance this Friday helps risk on markets recover
• AUD recovers back above 0.99 overnight as risk returns and USD weakens a little

Good morning. Well, the move lower in the EURUSD yesterday, through support at 1.2740, ran into buying interest at or around 1.2730, and hence was exhausted once again. The equity markets were indeed poised for something of a rebound as I mentioned in the morning update.

However the general tone and push lower in the EURUSD was seemingly defying the better European equity market performance and looked like a fundamentally driven move (and God knows we need more of those).

However, rather unsurprisingly that didn’t play out and as the US markets opened with solid gains that set up another equity market induced squeeze that continued after the London close.

As the US markets took the Dow much higher to close up 135 on the session at 12,504, the EURUSD naturally followed it, like the good Robot dog that it is.

I refer to it in those terms because of my deep love and respect of the equity/currency bots that rule this market most afternoons. Still we are where we are as it were.

If I am honest I could just advise you to trade EUR/USD every afternoon based on where I think the Dow will finish and that might work for you.

Of course it isn’t always that simple, but the correlation between the Dow and the EUR is way too close for my liking especially given that the index is only 30 companies strong.

There is in effect the potential for the fate of the single currency to rest with a completely unrelated corporate event – perhaps the invention of a revolutionary toilet cleaner by Johnson and Johnson that sees their share price move 20% in an afternoon!

Unfortunately currency overlay programs that work off the Dow aren’t yet sophisticated enough to disseminate whether or not the move in the benchmark is actually risk and dollar related or purely down to toilet cleaner.

In terms of that analogy, my comparison between the EUR and the wash down closet is not unrelated in the sense that ultimately that’s still where I think the single currency should be headed!

I will desist but I hope you take my point here? Now overnight the EURUSD traded briefly to 1.2825 but ran out of steam again and eventually slipped back into the Asian opening.

There’s been no news out of Europe other than the usual hot air and assurances from all the usual suspects. So nothing has changed and we will now have to wait and see what the Greeks decide to do at their next general election due on or around the 17th June.

Personally I think that the ECB and the EU authorities need to start implementing some serious growth led policies before the outcome of that event in order to give the Greek people some hope before they cast their votes once again.

If, indeed there is any real sincerity from all the politicians and central bankers regarding the desire to keep Greece inside the currency, then they need to act now.

It would be nice if we had a leader anywhere capable of making a decision. I cannot remember in my life time, a period dominated by such political lightweights on the world scene.

Today the economic release front is dominated by the UK RPI and CPI inflation data for April, due out at 9.30am followed by the OECD economic outlook for Europe and the EU May consumer confidence index (I’d be amazed if we get a good number here). Later we have US Richmond Fed Index and April existing home sales at 3pm- that covers it until the twilight hours.

Tonight, after midnight we have the release of the Japanese trade figures for April. That is expected to show that the country recorded a second straight deficit in a row of around $5 billion. That is due out at 12.50am tomorrow morning with the Bank of Japan interest rate decision due around the same time.

I think that the significance of another poor trade number shouldn’t be underestimated because if Japan is moving into a permanent trade deficit then that in effect removes the main driver for the whole strong yen thing.

Let’s face it the buying yen thing for safety is a sideshow really and was born out of the Japanese exporter’s constant need to buy the currency in the first place.

The natural demand to sell USDJPY on a regular basis could be even turned the other way dependent upon the breakdown of this imbalance. Further investigation is required to see where and how this potential new move into deficit country is being created.

So I do think that the trade balance is a more important event that the actual BOJ decision in a way, once one gets over the headlines etc. I don’t see anything from the BOJ in terms of any changes or additions to current policy tomorrow morning.

When assessing the argument for the weak or strong JPY one should look at the overall position of the country in terms of its ‘net debtor’ or ‘net creditor’ status. Japan is still a net creditor nation to the tune of around Y253 trillion (around $3 trillion).

An interesting article on one of the newswires this morning showed that in 2011 Japanese investments abroad grew 3.3% to Y582 trillion (that’s $7.3 trillion to you and me) apparently according to the MOF (Ministry of Finance) currency gains did erode some of the existing holdings, but the strong yen also helped encourage fresh outward investment, hence the overall increase.

Well, with such sales of the Japanese currency on a long term basis still going through the system and the potential for the long term trade deficit to be turned around, I hope you can understand why I believe the JPY to be hideously overvalued at current levels, particularly against the USD and the GBP.

Asian markets have traded higher following the positive closes in Europe and the US, but in all honesty the performance of the Nikkei looks very laboured to me and there doesn’t feel like there’s much appetite every time this index gets dragged, almost begrudgingly higher.

European bond spreads look very much unchanged ahead of the European opening and once again it’s the equity markets this morning that look like wagging the tail of the dog!

This morning European equity markets have opened higher and that has helped the USD and the JPY weaken further.

The risk off dynamic that helped gold back near $1600 has at the same time seen that move lower at the same time as Oil trades higher and the commodity currencies gain back some lost ground.

The dynamic that shifted in recent days to see gold trade higher as a safe haven is the main reason why that is falling back at the same time as Oil heads higher.

Naturally the Gold price is more of a risk barometer than anything else in the current environment so it is perhaps understandable to see that losing ground whilst the other risk on elements again.